Economics • Banking & FinanceHard
What does the term 'Basel III Leverage Ratio' measure independently of risk-weighted assets in banking regulation?
A. The proportion of Tier-1 capital relative to a bank's total exposure measure without risk weight adjustments✓ Correct Answer
B. The ratio of short-term liquid assets to total customer deposits held in current and savings accounts
C. The proportion of non-performing loans written off against cumulative provisioning reserves over a financial year
D. The ratio of foreign currency borrowings to domestic rupee-denominated liabilities on a bank balance sheet
💡 Solution & Explanation
The Basel III leverage ratio is defined as the capital measure divided by the total exposure measure, acting as a backstop to risk-based capital requirements by ignoring risk weight manipulations. Distractors describe deposit liquidity ratios, NPA write-off metrics, or foreign currency liability proportions. This non-risk-based metric prevents banks from building up excessive leverage relative to their capital base. It ensures a transparent safeguard against model risk inherent in risk-weighted asset calculations.
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